LG Chem merges with LG Life Sciences to focus on bio

Sept 13,2016

LG Chem is merging with the group’s pharmaceutical subsidiary LG Life Sciences, according to the company on Monday. The move comes as the chemical company aims to bolster its bio business as a future growth engine.

Board meetings were held at both companies on Sunday to approve the merger. The merger will be completed by the first day of 2017.

The merger is expected to create synergies.

LG Chem, which is focusing on three sectors - energy, water and bio - will be able to concentrate on the bio business, while LG Life Sciences will earn a stable source of funding for research and development on new drugs.

“Banking on [the merger] and the existing FarmHannong [which we acquired earlier], we aim to foster our bio business to a 5 trillion won ($4.48 billion) global business by 2025,” the company said in a statement Monday.

LG Chem acquired Dongbu FarmHannong, now renamed FarmHannong, in April to enter the bio business in the agriculture and food sectors. The merger with LG Life Sciences will expand the chemical company’s bio business portfolio into pharmaceuticals as well.

The focus of drug development will be on vaccines and increasing the number of products in the pipeline, the company said.

LG Life Sciences, which spent only 130 billion to 150 billion won on R&D over the last five years, will boost that to at least 300 billion to 500 billion won after the merger. Low levels of investment had hindered the growth of the company.

LG Chem has a relatively healthy cash flow, posting 3.1 trillion won in earnings before interest, tax, depreciation and amortization (EBITDA) last year.

“Even if the company invests 300 billion won annually [for R&D] it will be less than 10 percent the EBITDA of LG Chem,” said Miriam Kim from Yuanta Securities.

LG is not alone in shifting its focus to bio. As growth of existing businesses such as electronics and petrochemicals slows down, other conglomerates, including Samsung and SK, are also looking to the bio industry.

Samsung BioLogics, founded in 2011, which accepts contracts from other pharmaceutical companies to manufacture drugs, is preparing for a public listing on the Korean market this year.

SK also selected bio as its one of five future cash cows last year along with energy, semiconductors, information communications technology and IT. In February, it acquired shares of SK Biotek to make it a 100 percent subsidiary and is expanding the manufacturing facility of its drug making arm in Sejong City. SK Biopharmaceutical, SK Biotek and SK Chemical are affiliates in the bio sector.

The size of the bio market, including agriculture, food and pharmaceuticals, is currently around $1.1 trillion and is expected to grow into a $1.35 trillion market by 2020, according to market research companies.